Nippon Prologis REIT Inc

TSE:3283

Earnings Call Analysis

Earnings Call Transcript 2019-Q2

[Atsushi Toda, executive]

Welcome to the earnings presentation of Nippon Prologis REIT.

During the fiscal period ending May 2019, the subsequent follow-on offering, we continue to maximize our investor value through the steady growth of DPU and NAV per unit. Our operating performance continued to be solid, and our acquisition pipeline remains robust. Our NOI continued to grow at JPY 15.6 billion for the period. Our NOI exceeded the forecast by 1.1%. This outperformance was driven by the high occupancy. Our operating performance further improved. Our average occupancy rate for the period was 99%, significantly higher than preceding periods. The weighted average rent growth for the lease renewals, or re-tenanting, improved to 1.4%, reflecting strong demand from our customers. Our DPU for the period was JPY 4,502, exceeding our forecast by 1.6%. This also came from the higher-than-expected occupancy rate.

During the fiscal period, our AUM continued to grow by the acquisition of Prologis Park Tsukuba 1-A in December. In addition, with the acquisition of 4 new properties through the offering in June, our AUM grew to JPY 641 billion. Through the offering, we acquired 4 new Class A properties for a total acquisition value of JPY 63 billion. These 4 properties are modern Class A logistic facilities developed by the Prologis group. The average age of the properties is less than a year, with a long average remaining lease term of 11 years. Based on third-party appraisals, these properties will generate an attractive average NOI yield of 4.7%.

We have achieved significant accretion through the offering. Our stabilized DPU will grow by 3.2%, while our loan-to-value ratio will remain flat. Our NAV per unit has also grown by 40 basis points. Our balance sheet remains one of the strongest among all J-REITs.

By factoring in the new properties we acquired in June, our LTV on a book value basis will be 37.8% at the end of November. With this modest leverage and low debt cost, we have significant optionality for future growth. If we were to increase our leverage to 50%, we would have additional investment capacity of JPY 150 billion. Our most recent appraisals indicated the portfolio average cap rate of 4.4%, compressed by 10 basis points from 6 months ago. As a result of continued cap rate compression since our inception, the value of our portfolio and our NAV have continued to increase. Our balance sheet now contains unrealized gain of JPY 144 billion or 26% of real estate book value.

For the fiscal periods ending November 2019 and May 2020, we continue to expect solid operating and financial performance. Our DPU will continue to be in the range of JPY 4,400 to JPY 4,500, reflecting expected stable occupancy and our recent acquisition.

Over the last 6.5 years, we have continued to grow our investor value. DPU has grown by 37%, and NAV per unit has almost doubled through external growth, rent growth, debt cost reduction and cap rate compression.

Our strategy for growth remains unchanged and includes 2 components, external and internal growth. For external growth, we expect to acquire approximately JPY 50 billion to JPY 60 billion new properties per year from our sponsor, Prologis. We remain vigilant with respect to the timing and sources of funding by closely monitoring the status of the capital markets.

As for internal growth, we expect to achieve higher rent growth when the supply-demand equation becomes more imbalanced. We now have 11 pipeline properties with a total estimated acquisition price of approximately JPY 180 billion. We are advantaged to acquire these assets at fair value, exclusively from our sponsor, without being exposed to steep market competition.

Our earnings pace is very stable as we have a diverse portfolio in terms of number of tenants, tenant credit exposure and well-staggered lease maturities. At the same time, we'll be able to capture future upside as lease contracts expire.

In 2020 and beyond, we expect that the supply and absorption of new properties will be more imbalanced, and therefore, it will improve our rent growth. We continue to have the highest-quality portfolio, which is yielding 5.2% appraisal NOI and 5.3% cash-on-cash NOI, which compares to the current 4.4% market cap rate. The properties are young and with the most advanced specs as modern logistics facilities. We believe that such quality assets are in the best position to capture future upside.

Our balance sheet continues to be one of the strongest among all J-REITs. Our average remaining debt term is 5 years, and our all-in debt cost remains at just 60 basis points. With this strong financial position, we are highly resilient against capital market shocks and have the ability to grow across the cycle.

In terms of the size of market cap, we are now positioned the fourth among all J-REITs and the seventh globally as a public logistics real estate company, and we are included in all major stock indices. We believe that such a premium position will continue to attract investor interest globally.

We are highly rated by several third-party ESG agencies. Most importantly, we have been awarded the highest 5-star rating from GRESB for 4 years in a row.

First of all, the stock of modern logistics real estate continues to be scarce in Japan. While the supply is recently increasing, the current stock accounts for only 4.5% of the entire logistics space. This figure remains extremely low among developed countries compared to roughly 30% in U.S. and 15% in Europe.

In Tokyo, we are experiencing historically high supply this year, which is being made by historically high absorption. As a result, the market vacancy rate remains low at 5%. In 2020, the supply is anticipated to moderate. In Osaka, the supply has already moderated, and there has been constant demand. Accordingly, the vacancy rate continues to decrease, and we anticipate that the market conditions will further improve.

The pace of preleasing is increasing. For example, in the greater Tokyo area, the percentage of preleasing exceeded 47% at the end of 2018, relative to just 12% 2 years before. This acceleration of preleased space is partially attributable to the increased size of recent lease contracts. The average size of contracted leases in 2018 and 2019 is approximately 60% larger than the historical average in preceding years.

The accelerated growth of demand for modern logistic real estate is primarily attributable to the ongoing transformation of logistics business in Japan, including steady growth of e-commerce. Also, this is partially a result of increased dual-income households and aging population which is driving growth in the business of convenience stores and drug stores. Since Japanese convenience stores typically do not have on-site storage space, they create the need for modern logistics facilities in excellent locations.

Another tailwind for the logistics real estate business is the serious labor shortage. As a result of shrinking workforce, Japanese logistics industry is facing significant shortage of truck drivers and warehouse workers. As a result, our customers must streamline their operations and consolidate their facilities to larger floor place within modern logistics facilities. Also to attract the existing workforce, logistic properties now need to be located conveniently for commuting workers. Further, the properties need to be equipped with various amenities for workers.

Summarizing our presentation: number one, we continue to deliver strong performance, both operationally and financially; number two, we continue to have strong growth strategies, backed by our sponsor pipeline, quality portfolio, operations and the strongest balance sheet; and number three, Japanese logistics real estate market continues to be strong, backed by the structural transformation of logistics industry.

Thank you for your continued support.